Bigger stake is no longer needed for growth in Australia

Royal Dutch Shell’s decision to pare down its stake in Woodside Petroleum, once seen as one of its key assets in Australia, is a consequence of its success in building up its own broad portfolio of growth projects in the country, analysts said yesterday.

In little over 12 months, Shell has experienced a massive growth in Australia, including the emergence of an LNG venture in Queensland with PetroChina, progress on the Prelude floating LNG plant and the start of construction on the Chevron-led Gorgon project.

In that time, it has also enjoyed spectacular success with the drill-bit in its exploration venture off Western Australia with Chevron, potentially opening the way for it also to participate in Chevron’s rapidly progressing Wheatstone LNG venture.

Not that long ago it was a different picture, with Shell Australia’s non-Woodside business essentially comprising its own stake in the North-West Shelf venture, its interests in the undeveloped Sunrise and Browse gas projects and its refining business.

Shell Australia’s new chair, Ann Pickard, is now signalling potential investments of up to $50 billion across the portfolio, making the international oil major one of the biggest investors in the Australian oil and gas sector in its own right. Shell’s Australian LNG investment portfolio has grown to some 16 million tonnes per year of LNG through direct stakes, vastly bigger than just a few years ago when Shell’s growth outlook in Australia was predominantly via Woodside.

At the same time, Woodside’s own growth prospects have dimmed, despite its $13 billion-plus Pluto LNG project set to start production next year. Beyond Pluto-1, none of Woodside’s three main expansion projects – a Pluto expansion, the Sunrise and Browse LNG ventures – has a clear path to development.

“You’re seeing a position where Shell is pretty bullish on its own growth potential within Australia and obviously that’s more material to someone like Shell than a one-third interest in Woodside where they can exert less control, and it’s less material to them as a company," said Craig McMahon, head of Australia upstream research at Wood Mackenzie in Perth.

“So based on the strong dollar the rally in Woodside’s share price in the last few days it makes good sense to liquidate some of that interest and actually generate some of that cash to focus on some of its developments elsewhere."

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Shell’s $42.23 exit price for the Woodside shares, while a discount on the previous close, is understood to compare favourably to the book value of the stake, particularly with the Australian dollar now at parity with its US counterpart.

On top of that, participating in Woodside’s recent dividend reinvestment program has limited cash flow back to Shell, while Woodside has its own substantial capex commitments.

“With Shell now exposed to numerous direct investments in Australia such as Gorgon, coalbed methane-to-LNG, Prelude and 9 trillion cubic feet of new discoveries since 2004, the Woodside assets are increasingly misaligned," analysts at Wall Street research firm Sanford C Bernstein said.

Shell is also set to be “an absolutely key player" in the expected expansion of Chevron’s Wheatstone LNG project in WA, where it owns 50 per cent of the Acme and Clio gas fields that are expected to underpin the project, Wood Mackenzie’s Mr McMahon said.